Taming the Dragon

It's what some refer to as the great "call" of China -- the siren song of the most populous market on earth, one that is virtually untapped by outsiders. Ferocious foreign interest has zeroed in on this vast Pacific Rim nation due in large part to its switch to a market-based economy coupled with a growth rate of more than 8% over the past 20 years. Since China has weathered the financial storm that shook the economies of Asia, its 1.2 billion consumers are demanding everything from banking and agricultural products to entertainment and Internet providers. And now that the U.S. Senate has approved permanent normal trade status for China, the framework is set for a new U.S.-China trade arrangement under which China is to open its doors to American businesses and investors.

But doing business in China has never been easy, particularly for foreigners. Even with recent reforms, it is complicated by the profound differences between Western and Chinese cultures, the continued involvement of the central government, and the mainland's unique business values and philosophies.

"Doing business in China is difficult," explains Hong Kong businessman Lawrence Pang. The CEO of the technology company Digital Vision Multimedia, Pang now spends two-thirds of his time building offices in the mainland's cities. "China can be an ideal market. If you have adequate resources, intelligence, and endurance, you will be rewarded with insider status. But if you don't, you will see big losses."

Setting up shop in China hasn't been easy for Pang and other Hong Kong-based Chinese entrepreneurs, despite their proximity, shared heritage, and status as the biggest outside players in the market. While possessed of certain advantages, they too have had to deal with the great divide between the mainland and the rest of the world. But despite the challenges that China presents, some entrepreneurs have been successful. They offer these tips for other entrepreneurs contemplating a China venture.

Pick a partner

Even to the Hong Kong business community, China can seem like a world apart. That's why most insist on finding a local partner who can help bridge gaps in communication, culture, and business practice.

"Even on the Internet, you need a Chinese partner," says Pang, whose company is a major investor in the Chinese Books CyberStore, the Amazon.com of China. "They know all those unwritten rules."

Pang advises looking for a partner who is both trustworthy and politically connected. His opinion is seconded by Ip Chi Hung, chairman of the Chung Pak Battery Works Ltd.

"It's a win-win situation, especially with manufacturing and high technology," agrees Ip, whose Hong Kong-based manufacturing business operates two factories in China.

Learn the language

Know the language or hire someone who does, not only to ease communication, but also to demonstrate your regard for the country.

"It shows a respect for the culture," explains Peter Lau, chairman and CEO of Giordano International Ltd. His Gap-like retail chain has opened more than 250 stores in China. The Hong Kong-based company operates a total of 740 outlets worldwide, with 1999 sales of $3.1 billion (in Hong Kong dollars), or $402 million (in U.S. dollars).

A smart move: Enroll in a Mandarin Chinese class at your local university or language school. Although there are at least eight dialects widely used in China, Mandarin is the official language and the most widely spoken one.

Make China's advantages yours

Rock-bottom land and labor costs are just a few of the advantages of starting a business in China.

"During these years of reform, China has its advantages -- land, labor supply, natural resources, consumer goods, management and tech personnel are all readily available. Land is 100 times cheaper on the mainland than in Hong Kong, for example, and labor is 10 times cheaper," explains Ip. He exploited these benefits to build his battery company from a HK $150,000 (US $19,225) investment into a HK$1 billion (US $128.4 million) business in just 20 years. "Make good use of the available resources," he says.

China is not homogenous

"Remember that China is not one market. It's more like seven unique markets," Lau says. "Even the language and dialects are not the same."

That means you may need different partners, marketing plans, or focuses depending upon the region.

Get to know guanxi

he concept of relationship, or guanxi, is integral to Chinese society. Guanxi is the network of relationships a person develops and cultivates through the exchange of gifts and favors to attain mutual benefits. People who share a guanxi network are committed to one another by an unwritten code. In the past, Chinese merchants, in the absence of fixed laws and regulations, have traditionally relied on their strong ties and guanxi with political party functionaries, administrators, and others to get things done. It's a practice that continues to this day.

Of course, the value of social networking is nothing new to Western entrepreneurs.

"Having worked in Canada for 12 years, I can tell you there is relationship building, networking, and an old-boy network that exists all around the world. I don't see a big difference," Lau says. "People try to mystify guanxi, and I got my nose bloody trying to understand it. But it's not a mystery. It's equally hard to do business in the U.S. or Canada."

However, most will tell you the singularly Chinese concept of guanxi is different. Unlike networking in the U.S., it is focused on the utilitarian reciprocation of favors in unequal relationships. In addition, it is based on friendship and affection first, not necessarily business ties, and the obligation to respond to requests for assistance. Disregarding this commitment can completely destroy a business executive's prestige and social reputation.

Be aware of the central government's role

Never underestimate the power of the Chinese government in business, even today. A deal struck at the provincial level isn't always safe from changes in policy and regulation at the central level.

At the same time, remember that the all-important guanxi network of a business executive in China extends not only throughout the corporate world, but also throughout the government bureaucracy. Many Hong Kong entrepreneurs will freely admit that it's important to grease the wheels of government bureaucracy with well-placed gifts and personal relationships with those in power, but the machinations of Chinese power structures aren't generally transparent to Westerners.

The Chinese generally view such activity not as bribery but simply as the reciprocitation of favors given and politeness shown as part of guanxi, according to Pang.

Finally, there remain many state-owned enterprises throughout the country, which an outsider may not be able to recognize.

"The Communist Party is still the biggest company in China. You have to know your way around and know who is who," says Mark Kwok, managing director of the Wing On Department Stores, one of Hong Kong's oldest retailers. Founded in 1907, it continues to operate stores on the mainland. If you simply go by a company's name, you may think you're doing business with several independent companies, only to find out later that they all have the same owner -- the state, explains Kwok.

Beware the legal structure and contracts

Although there are hundreds of major laws and regulations that apply to foreign investment, much of China's legal and regulatory system does not apply to joint venture operations. In addition, "contracts" are not set in stone.

"In Hong Kong, a contract is a contract. In the U.S., a contract is a contract. But not in China," says Kwok.

In China, a contract is more like a historical document and can change at any time, Pang explains.

Understand your social responsibilities

Socialism is far from dead in China, and entrepreneurs operating companies there must make special provisions not only for their workers, but often for their communities as well.

For example, Chung Pak houses its factory workers (most of them young women bused in from far-off villages) on site and feeds them four meals a day. In addition, the company provides free electricity for the entire street its plant sits on as part of its corporate social responsibility.

"It's not something we would choose to do really, but it's a part of the socialist philosophy," says Raymond K.P. Ip, managing director of Chung Pak and son of Ip Chi Hung.

Exploit your own advantages

"Hong Kong entrepreneurs may have certain advantages -- they know the language, they know their way around. But don't overplay the supposed mysteries of the Chinese way of doing things," Lau advises.

In fact, having a foreign perspective can be beneficial.

"Sometimes being an outsider may work well for you. You may be more open-minded or have a new perspective. It all depends on how you play it," says Zhou Nan, head of the marketing department at the City University of Hong Kong. "That's why the role that Hong Kong entrepreneurs and managers play in China will continue to decline and the role of other outsiders will grow."

Don't overstay your welcome

While patience and endurance are important when entering China, knowing when to cut your losses may be even more critical.

"It's a misconception that investing in China has to be a long-term thing," says Lau, whose retail chain first entered the mainland market in 1992 and is speeding up expansion there by 50 to 100 stores this year. "If there is no profit in three years, don't stay. One of our rules is we have to see a profit in the first year."

Count on continued change

China still has a lot of catching up to do to make up for the many years when business laws and business education were virtually non-existent. But the country is doing so at breakneck speed. Continued positive changes are all but guaranteed, according to members of the Hong Kong business community.

"There still is more corruption in China. But it's no different than the U.S. was in the 1950s," Lau says. "It is just a phase of the economic life cycle of a nation. They're not doing anything that has not been done in the U.S. before. It will all cycle out in 30 years or so."

"There is opportunity behind every difficulty," adds Pang. "China has changed a lot and the rules are still changing. Now China is more rational than it was, and the years of fewer differences are coming. It's becoming more businesslike and soon it will start to play the game by international rules."

Inc.com producer Stephanie Overby traveled to Hong Kong and mainland China as a CASE (The Council for Advancement and Support of Education) Media Fellow to study Chinese Entrepreneurship as a guest of the City University of Hong Kong.